In its recent ruling in Precision Plating Ltd v Axa Pacific Insurance Co. (“Precision Plating“), the BC Court of Appeal considered when a pollution exclusion in a Commercial General Liability (“CGL”) policy would operate to release an insurer from its duty to defend its insured in a third party lawsuit. In the past, such cases typically addressed whether the loss was “sudden and accidental” or whether the released substance fell within the definition of “pollutant”. Precision Plating was focused instead on the concept of causation in the context of exclusion clauses.
The insured company (“Precision”) operated an electroplating business in a multi-tenanted commercial building in Surrey, BC. In April 2011, a fire broke out at Precision’s premises (the “Fire”), triggering a sprinkler system. The water from the sprinkler caused vats of chemicals to overflow. The overflowing chemicals escaped Precision’s premises and damaged the premises of the neighboring businesses within the building.
The owners of four neighboring businesses (the “Claimants”) sued Precision, alleging property damage caused by the chemicals that had leaked during the Fire (the “Lawsuits”).
Precision applied to the courts seeking a judicial declaration that its insurer (“AXA”) was obligated to defend Precision in the Lawsuits under a CGL insurance policy issued by AXA to Precision (the “Policy”). AXA argued that a pollution exclusion clause eliminated any coverage.
At trial, the BC Supreme Court ruled that the damage to the Claimant’s property was caused by the Fire (not pollutants) and AXA was thus obligated to defend Precision in the Lawsuits as the pollution exclusion did not operate to exclude coverage. AXA appealed.
The Pollution Exclusion Clause
The relevant provisions of the Policy issued by AXA read as follows:
Coverage: To pay on behalf of the Insured all sums … that the Insured shall become obligated to pay by reason of liability imposed by law upon the Insured … for compensatory damages because of:
(a) bodily injury sustained by any person or persons;
(b) personal injury;
(c) property damage due to an accident or occurrence.
… subject to the limits of liability, exclusions … in the Policy.
Exclusions: Coverage provided by this Policy does not apply to …:
(b)(i) Bodily Injury, Personal Injury or Property Damage caused by … or arising out of the … discharge, emission, dispersal, seepage, leakage, migration, release or escape … of Pollutants:
(1) at or from any premises, site or location owned, rented or occupied at any time by an Insured
The pollution exclusion wording in this decision is fairly typical of what has been termed the “absolute pollution exclusion” which insurers developed in the 1980s in an attempt to further restrict coverage for ever growing environmental claims.
Focus of Analysis – Causation Of Alleged Liability
The claim in question clearly fell within the grant of coverage. The issue at hand was whether the exclusion pollution applied to relieve AXA of its duty to defend.
AXA refused to defend Precision in the Lawsuits, claiming that Precision’s alleged liability to the Claimants arose because of the discharge or escape of ‘pollutants’, and that the pollution exclusion applied in these circumstances and coverage was thus excluded under the Policy.
Precision argued that it had purchased the Policy from AXA to cover itself specifically for damages caused by fire, and that any liability which Precision may owe to the Claimants actually arose because of the Fire (covered by the Policy), which subsequently caused the chemicals to escape. Precision’s focus was on the immediate cause of the damage, i.e., the Fire.
The Court’s Ruling
The Court of Appeal ruled that in interpreting the pollution exclusion, what matters is the true cause of the insured’s liability, as opposed to the cause of the damage or potential damage from the event. The Court of Appeal also found that where the insured’s alleged liability was caused by an excluded (or uncovered) loss, the insurer is not under a duty to defend, even if the liability was concurrently caused by an event that would be covered by the subject policy.
The Court of Appeal ruled in favor of AXA, finding that the pollution exclusion operated to exclude coverage in the circumstances because Precision’s liability, as alleged by the Claimants, arose due to the escape of pollutants.
The Court ruled that the Policy (and CGL policies in general for that matter) provided coverage for the insured’s liability or potential liability to another party, and not necessarily coverage for damage or potential damage. Reading the coverage and exclusion provisions in the Policy, it was clear to the Court that the Policy was meant to cover Precision’s liability, not damages. The Court of Appeal stated that “it is not the true cause of the damage that is relevant, but the true cause of [Precision’s] liability” that is relevant in determining whether the Policy provides coverage or an exclusion clause applies. This was a crucial distinction in Precision Plating because the Court ruled that, while the damage in this case may have been caused by the Fire, Precision’s liability to the Claimants arose specifically because of the escape of ‘pollutants’ from Precision’s property.
In addition, the Court held that when applying an exclusion clause contained within an insurance policy, coverage was to be excluded under the Policy where the damage or liability arose from an excluded event, regardless of whether the excluded event was the sole or concurrent cause. This meant that, even if the release of pollutants was a concurrent cause (along with the Fire) of Precision’s liability, coverage would be excluded by operation of the pollution exclusion. The Court held that so long as the liability was “caused by, resulting from, contributed by, or aggravated by” an excluded event, then coverage was excluded under the Policy.
The Court concluded that the pleadings of the Claimants specifically alleged liability for the release of pollutants, and that this type of liability was explicitly excluded by Pollution Exclusion. Thus, AXA was not under a duty to defend or indemnify Precision for its losses.
The Court of Appeal’s ruling in Precision Plating is of importance to both insurers and insureds when entering into and enforcing CGL policies which have exclusion clauses. By concluding that CGLs provide coverage for an insured’s liability (rather than for damages), the Court in Precision Plating placed an emphasis on the “true cause” of the alleged liability of the insured in determining whether coverage is provided or excluded under a policy. It is the cause of the insured’s liability to third parties which determines whether coverage is provided under a CGL, not the cause of the damage.
While many courts have adopted a more restrictive approach to the interpretation of exclusion clauses, the Court of Appeal in Precision Plating adopted a broad approach to interpreting and applying exclusion clauses incorporated in insurance policies. This Court ruled that, if the damage or liability is caused by both a covered event and an excluded event concurrently, coverage is still excluded under the Policy. This aspect of the ruling is especially advantageous for insurers seeking to rely on the application of exclusion clauses in order to avoid their duty to indemnify or defend its insured. Where an event contemplated in an exclusion clause, such as the release of pollutants, is even a concurrent, aggravating or contributing cause (among other causes which may be covered) of the liability or damage, the exclusion clause will operate to exclude coverage under the Policy.
If you have any questions about this case or other insurance law matters, please contact Samantha Ip (604.643.3172 or email SIp@cwilson.com) or the editor, Glen Boswall (604.643.3125 or email GBoswall@cwilson.com), or any other member of the Clark Wilson’s Insurance Group.
Thank you to Daniel Paperny for his assistance with this article.